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Brazil, Sao Paulo: Credit rating agencies are poised to give AmBev a unique status among Brazilian companies if the brewer's $11.5 billion deal to merge operations with Belgium's Interbrew goes ahead as planned, Reuters posted on March 11. Standard & Poor's and Fitch Ratings, two of the three best-known credit ratings agencies in the world, have signaled they could raise Companhia de Bebidas das Americas' (AmBev) foreign-currency debt rating as a result of the deal, which would create the world's biggest brewer in terms of volume.

Currently at "B+" for both agencies, an upgrade would give AmBev's debt a better foreign currency rating than Brazil's sovereign debt, also at "B+," which is generally the highest rating a Brazilian company can receive by S&P and Fitch. Moody's, the other important credit ratings agency, does not follow that rule. Such an upgrade by S&P or Fitch would reduce the cost of borrowing by AmBev since its bonds would be considered less risky investments.

If the upgrades were large enough -- by at least four notches by S&P and Fitch -- the bonds would be considered "investment grade," which means more institutional investors would be allowed to buy them. "The goal is to make the cost of capital cheaper. The more the company climbs up the rating scale, the less they pay for debt," said Paulo Bernardo, director of Banco BBVA in Brazil.

Under the terms of the agreement announced last week, Interbrew will buy a majority stake in AmBev through a complicated equity swap, stock issue and share tender that the Belgian brewer valued at $11.5 billion. AmBev in turn will take over Interbrew's assets in North America, the most important of which is Canada's Labatt brewery. AmBev's shares will remain separately listed in Sao Paulo and New York.

Brazilian companies are forced by law to exchange any foreign currency debt issues into reais and bring the funds back into the country within 180 days of the sale. It is because of this law that S&P and Fitch use the sovereign rating as a ceiling for corporate debt. But under AmBev's new structure, it will have revenue in U.S. and Canadian dollars that it will not be forced to bring back into Brazil.

"AmBev is going to have part of its cash generated in markets without that limitation. When we talk about the United States, we're talking about an 'AAA' market. Canada is 'AA+,' said Rafael Guedes, head of Fitch's office in Brazil. Last week after AmBev and Interbrew unveiled their tie up, Fitch said it was placing AmBev on Rating Watch Positive, which means it is reviewing its rating for a possible upgrade.

S&P has signaled that it also might improve AmBev's rating and if both agencies follow through, it would be the first time a Brazilian company's debt has a better rating than the country. "Today, of the companies we rate (in Brazil), none have ratings higher than the sovereign debt," said Reginaldo Takara, head of corporate ratings for S&P in Brazil. On top of a better rating for AmBev, its new assets in Canada will allow the company to issue debt via Labatt at better rates.


12 March, 2004